June 30, 2021
Denmark publishes draft bill relaxing transfer pricing documentation requirements in relation to domestic controlled transactions
On 23 June 2021, the Danish Ministry of Taxation published a draft bill which proposes to exempt most domestic controlled transactions (that is, transactions between two Danish controlled parties or DK-DK) from the Danish Transfer Pricing (TP) Documentation requirements.
The draft bill is out for consultation until 18 August 2021, and it is proposed to be effective for income years starting 1 January 2021 or later.
It is expected that this legislative change will significantly reduce the compliance burden for a number of Danish-based companies.
The draft bill follows the recently adopted Danish legislation regarding mandatory submission of TP documentation for income years starting 1 January 2021. According to the new legislation, the TP documentation must be submitted to the Danish tax authorities no later than 60 days after the deadline for filling of the annual corporate income tax return. For more details on the new legislation, see EY Global Tax Alert, Denmark enacts new rules on international taxation, dated 3 December 2020.
The purpose of the draft bill is to reduce unnecessary administrative burdens on Danish taxpayers. The draft bill is intended to ensure that the TP documentation requirements do not go beyond what is necessary to minimize tax speculations and prevent tax avoidance.
The TP documentation requirements for DK-DK controlled transactions were introduced in 2004. Extending the TP documentation obligations to also cover DK-DK controlled transactions was to ensure that the Danish TP documentation requirements were not in breach of the European Union (EU) rules regarding the principle of the freedom of establishment.
Based on recent case law of the European Court of Justice (C-382/16, Hornbach-Baumarkt), TP documentation requirements that only cover cross-border controlled transactions cannot be considered to be in breach of the EU rules. The Court concluded that the freedom of establishment principle does not preclude a country from adopting more restrictive rules for cross-border controlled transactions than the rules applicable for purely domestic controlled transactions.
The draft bill therefore proposes that the obligation to include DK-DK controlled transactions in the TP documentation should only apply in situations where the controlled transactions can give rise to tax avoidance. Consequently, it is proposed to exempt DK-DK controlled transactions from Danish TP documentation requirements except for DK-DK controlled transaction where income is taxed according to preferential tax regimes e.g., Tonnage Tax Act, Hydrocarbon Tax Act, or Cooperatives taxation.
For additional information with respect to this Tax Alert, please contact the following:
EY Godkendt Revisionspartnerselskab, Copenhagen
EY Godkendt Revisionspartnerselskab, Aarhus
Ernst & Young LLP (United States), Nordic Tax Desk, New York